In the Matter of EDWARD D. and JUDITH K. KORTMAN, Petitioners	HUDBCA No. 87-1786-G121 (Claim No. 7-65089625-0)
Gary L. Kohut, Esquire UAW-GM Legal Services Plan 140 South Saginaw, Suite 700 Pontiac Mace Pontiac, Michigan 48058
Heidi Weckwert, Esquire Office of General Counsel U.S. Department of Housing    and Urban Development Washington, D.C. 20410

DECISION AND ORDER

Statement of the Case

Petitioners were notified by a Notice of Intent dated October 2, 1986, that, pursuant to 31 U.S.C. ?3720A, the Secretary of the U.S. Department of Housing and Urban Development ("HUD") intended to seek offset by the Internal Revenue Service ("IRS") of any 1986 tax refund due to the Petitioners against a claimed past-due legally enforceable debt of the Petitioners to HUD. The Notice of Intent required that Petitioners submit any evidence in support of their position within 65 calendar days after the date of the Notice. Petitioners filed a timely request to present evidence that the debt was not due or not legally enforceable. As a result of that request, referral of the debt for offset by IRS was temporarily stayed. On December 30, 1986, a Decision and Order was issued which vacated the order of October 21, 1986 imposing the stay and which authorized the Secretary to refer this debt to the IRS for offset against Petitioners' 1986 tax refund. This is the full text of that Decision and Order.

Findings of Fact

1. On August 9, 1978, Petitioners executed and delivered to Church Building Co. a home improvement installment loan contract (the "contract") in the amount of $32,724 for a home improvement loan which was secured by a mortgage on their property and insured against nonpayment by the Secretary pursuant to Title I of the National Housing Act, 12 U.S.C. ?1703 (Govt. Exh. A; Govt. Response to Pet. Submission, Exh. 1).

2. Thereafter, Church Building Co. assigned the contract to Michigan National Bank (Govt. Exh. A).

3. Petitioners failed to make payments as agreed in the contract. Subsequently, Michigan National Bank assigned the contract to the United States of America in accordance with 24 C.F.R. ?201.54. The Secretary is the holder of the contract on behalf of the United States of America. (Govt. Exh. A, p. 2.)

4. Petitioners are currently in default on the contract. Efforts made by the Secretary to collect from Petitioners other than by offset have been unsuccessful. The Secretary claims the following amounts are past-due and owing: $13,971.82 as the unpaid principal balance as of October 30, 1986; $2,986.49 as the unpaid interest on the principal balance at 9 percent per annum through October 30, 1986; and interest on the principal balance from October 30, 1986 at 9 percent per annum until paid. (Govt. Exh. B.)

Discussion

Petitioners claim that the law of the State of Michigan requires that a secured creditor must first foreclose on the real property and obtain a "judgment of foreclosure." (Letter from counsel for Petitioners, at 2, item 2). Petitioners also assert that pertinent sections of the law governing mortgages in the State of Michigan require that any secured creditor who did not participate in a foreclosure action affecting that security must obtain a judgment in an appropriate judicial proceeding for the amounts claimed. The Government has failed to submit any documentary evidence of a foreclosure sale, and Petitioners do not contest the Government's averments of the amounts which the Government claims are past-due and owing on this defaulted loan agreement. Nor have Petitioners submitted any documentary evidence which would show that there remains a secured interest in the property which, Petitioners allege, would require HUD to exhaust a security interest under applicable Michigan law. If there were a prior foreclosure which extinguished all liens upon Petitioners' property, the only means now available to HUD to recover this outstanding debt would be an action on the loan agreement of which Petitioners are in default. Maura O'Keefe, HUDBCA 86-1194-F202 (January 7, 1986); Alan V. Arch, HUDBCA 87-1915G248 (February 4, 1987)

Petitioners claim that a judicial determination of the amount of the deficiency is required under the law of the State of Michigan. Mich. Comp. Laws Ann. ?600.3280; Mich. Stat. Ann. ?27A.3280. However, the state statute cited by Petitioners refers to "suits" to recover deficiency judgments against mortgagors and is applicable as a defense by a "defendant against whom a deficiency judgment is sought." These are not the circumstances of this case. The Petitioners are not defendants against whom HUD is seeking deficiency judgment, nor is a deficiency judgment a pre-condition for recovery of a part or all of this debt through administrative offset.

Mich. Comp. Laws Ann. ?600.3280 states in pertinent part:

This section [relating to foreclosure, deficiencies, and defenses] shall not affect nor apply to the rights of other purchasers or of innocent third parties, nor shall it be held to affect or defeat the negotiability of any note, bond or other obligation secured by such mortgage, deed of trust or other instrument.

The loan agreement signed by Petitioners states, inter alia, that "upon default ... the entire unpaid Total of Payments and all other sums due hereunder shall become immediately due and payable at the option of the holder of this Contract and without necessity of notice to Buyer." HUD, the holder, has properly demanded payment pursuant to the terms of the agreement.

The interpretation of Michigan law set forth at 16 Mich. Law and Practice, Mortgages, ?l0l.Action on Debt, at 391, does not limit the "remedies of the mortgagee ... to the lands mentioned in the mortgage," nor do they require a creditor to "sue on the debt or evidence thereof as a substantive cause of action without regard to the mortgage" even where a "bond or other separate instrument to secure payment shall have been given . . . ." These provisions merely entitle a creditor to do so. See Mendelson v. Realty Mortgage Corporation, 241 N.W. 154, 257 Mich. 442 (1932). Therefore, even if HUD remains possessed of a security interest in the subject property, the fact that HUD has not elected to pursue an independent action at law through a judicial proceeding in a Michigan court does not invalidate its recovery of this debt through administrative offset. I do not find that this means of recovery of Petitioners' debt, which is authorized by the Deficit Reduction Act of 1984, P.L. 98-369, 31 U.S.C. ?3720, et seq., is precluded or restricted by the law of the State of Michigan. Mich. Comp. Laws Ann. ?600.3280; see also Guardian Depositors Corporation v. Powers, 296 N.W. 675, 678, 296 Mich. 553 (Mich. 1941)

Petitioners contend that the value of the property in 1985 exceeded the loan balance remaining at the time of the sale and, consequently, "there should be no deficiency owed to HUD." (Petition for Review, at 3.) The Petitioners argue that since the market value of the property "was at least $42,000 at the time of the foreclosure," based upon a property tax assessment of the property at $21,200, which, Petitioners aver, "is equal to 50 percent of the true cash value" as required by Michigan law, the sale of the property should have resulted in the recovery of an amount sufficient to satisfy any remaining indebtedness on this loan. This argument is fallacious and predicated on rash speculation. If Petitioners' representation that there was a foreclosure is accepted as true, the Petitioners have submitted no evidence which would show (1) that the appraisal of this specific property for tax assessment purposes was in fact 50 percent of the "true cash value" of the property, (2) that the foreclosure sale was required to result in the sale of Petitioners' property at or near its "true cash value, or (3) that the foreclosure sale was conducted in a manner which was so improper as to result in the sale of Petitioners' property at an unreasonable sale price. Notwithstanding the lack of any evidence in the record before me of the amount Petitioners' property was sold for at the foreclosure sale, the fact that the sale of property in a foreclosure action results in a sale price well below the market value of that realty is, ipso facto, not evidence that the foreclosure sale was conducted in an improper manner or that the sum received as a result of the sale was unreasonable.

The Petitioners argue that there are several shortcomings in the procedures authorized by the Deficit Reduction Act. The validity of this argument cannot be considered in this proceeding; this issue is rejected for lack of jurisdiction. The Deficit Reduction Act, inter alia, sets forth a Federal agency's obligations to any debtor affected by the debt collection mechanism authorized by this statute. The relevant sections of this law require only notice to the debtor, the opportunity for the debtor to present evidence, consideration of all evidence submitted, and a determination as to whether the debt is past-due and legally enforceable before the debt can be referred to the IRS for offset. 31 U.S.C. ?3720A. The Secretary properly notified Petitioners of his intent to seek an administrative offset, and Petitioners were afforded an opportunity to submit evidence in opposition to this proposed action. Petitioners' submissions were considered, and this determination is being made to ascertain whether the present debt is past due and legally enforceable. I find that Petitioners have not been denied any procedural rights authorized by the Deficit Reduction Act.

Petitioners submit that this administrative offset procedure is in violation of the due process clause of the constitutions of the United States and the State of Michigan. To the extent that Petitioners' claim is based upon a denial of their constitutional rights, or that 31 U.S.C. ?3720A is unconstitutional, or that Departmental regulations implementing this Act are unconstitutional in that they fail to cure the constitutional deficiencies of the Act, I am without authority to consider or decide such claims in this administrative proceeding. Cf. American Stevedores v. Salzano, 538 F. 2d 933 (2nd Cir. 1976); School Board v. HEW, 525 F. 2d 900, 908 (5th Cir. 1976); Ronald Durr, HUDBCA 86-1422-F413 (March 28, 1986). For the foregoing reasons, I find that Petitioners' debt to HUD is past-due and legally enforceable in the amount claimed by the Secretary.

Order

Petitioners are indebted to HUD in the amounts set forth in Finding of Fact No. 4 of this Decision. The Order dated October 21, 1986 imposing the stay of referral of this matter to the Internal Revenue Service is vacated. It is hereby ORDERED that the Secretary of the U.S. Department of Housing and Urban Development is authorized to refer the debt to the Internal Revenue Service in accordance with 31 U.S.C. ?3720A for offset against any refund which is due Petitioners.

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April 9, 1987